Global Entrepreneurial Activity Plunged 25 Percent Last Year

Business Wire,  Nov 13, 2002  

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KANSAS CITY, Mo.--(BUSINESS WIRE)--Nov. 13, 2002

Pace of U.S. Startup Activity Leveled Off Signaling Halt to Decline,

According to Study Sponsored by the Kauffman Foundation,

Babson College and London Business School

Global entrepreneurial activity plunged 25 percent last year reflecting a universal decline in national economic growth.

Interest by would-be entrepreneurs to start new businesses dropped sharply last year in all developed countries, according to the 2002 Global Entrepreneurship Monitor (GEM). This study of entrepreneurship and economic growth in 37 countries was conducted by Babson College and London Business School, and funded by the Ewing Marion Kauffman Foundation.

With the exception of the U. S., particularly steep declines were recorded by the G 7 countries, which include Canada (-22 percent), France (-57 percent), Germany (-35 percent), Italy (-42 percent), Japan (-65 percent), and the United Kingdom (-31 percent).

The percent of adults in the U.S. aged 18-64 involved in the start-up process or engaged as the owner/manager of a business less than three and a half years old dropped to 10 percent of the population in 2002. However, the change from 2001 (at 10.5 percent) was not statistically significant. In other words, the prevalence of entrepreneurship in the U.S. appears to have leveled off. Most of the decrease from the 2000 high of 16.6 percent seems to be related to the economic decline of late 2000 and early 2001.

"It appears that the U.S. has stabilized at a level of entrepreneurial activity that will allow us to begin rebuilding or at least maintaining our current position for some time," said Larry Cox, director of research at the Kauffman Foundation and GEM project director.

According to Paul Reynolds, the GEM project coordinator and a professor at both Babson College and London Business School, the pattern of global decline in entrepreneurial activity mirrors changes in the growth of national GDP (gross domestic product) in the GEM countries between 2001 and 2002.

"Evidence continues to accumulate that the national level of entrepreneurial activity has a statistically significant association with the national level of economic growth in the following years," said Reynolds.

However, even though the average rate of entrepreneurial activity among countries has fallen, the number of entrepreneurially active individuals has actually increased over the years the GEM studies have been conducted due to increases in human population. For example, among the 20 countries analyzed during the GEM 2000 study, the number of entrepreneurially active individuals has increased from 123 million in 2000, to 133 million in 2001, to 161 million in 2002.

According to the GEM 2002 study, about 286 million people, or 12 percent of the 2.4 billion labor force in the 37 GEM countries analyzed, are involved in new business formation.

The number of individuals involved in entrepreneurial activity varies sharply from country-to-country. Overall levels of activity are relatively low in Europe, Central Europe and developed Asian countries; moderately high in Latin America and former British Empire Anglo countries (including Australia, Canada, New Zealand, South Africa, and the United States); and highest in the developing Asian countries, where entrepreneurship is more the result of economic necessity.

The GEM 2002 study, an expansion of the groundbreaking 1999 GEM report that analyzed entrepreneurial activity in 10 countries, revealed that entrepreneurship is as much a factor of an individual toiling in a garage to develop new product and service opportunities, as it is to an individual who starts a new business because he/she is living in a garage out of economic necessity.

About two-thirds of individuals reported they are voluntarily pursuing an attractive business opportunity. In contrast, the remaining one third, about 107 million individuals, reported they were involved because they had "no better choices for work." Such efforts are referred to in the study as "necessity entrepreneurship," reflecting the individual's participation in entrepreneurship as their perceived best option for employment, not necessarily their preferred option. Opportunity entrepreneurs dominate in developed countries, while necessity entrepreneurs are up to half of those involved in developing countries.

Other key findings:

-- Men are more than twice as active in entrepreneurship as women, and 25-44 year olds represent the most active age group.

-- The process that leads to women being involved in entrepreneurial activity may be different than for men. In developed countries, women are more involved where there is equality in career opportunities; in developing countries women's participation may reflect the lack of jobs and an inadequate education.

-- Informal financial support for start-ups was five times that of domestic venture capital support ($300 billions versus $60 billion) among the GEM 2002 countries, replicating findings from previous GEM assessments. Nearly one-half of all informal investments goes to family members.

-- Venture capital support declined significantly between 2000 and 2001 as the potential for successful initial public offerings declines; informal support was more consistent, reflecting the greater stability in the grassroots level of entrepreneurial activity.

-- The majority of all new firms may be considered family firms, according to a pilot analysis of selected countries conducted in conjunction with the Raymond Family Business Institute.

-- Government policies, cultural and social norms and education and training are among the unique features generally discussed by entrepreneurship experts in all counties as either a national strength or weakness.